Governments in the US, Europe, and elsewhere are exploring digital central currencies. Amidst the post-pandemic economic reforms the digital dollar and e-euro offer some obvious benefits. Lower transaction costs, better speeds, and improved tracking will be useful to most stakeholders. On the other hand centralized digital currencies raise certain concerns. We explore the implications that these new forms of currencies would have.
The age of CBDCs
Ensuring the availability of paper money can become a challenge during emergencies. This was brought to light during the COVID-19 outbreak. In the US there were delays in distributing stimulus payments, sometimes lasting weeks. Central bank digital currencies (CBDCs) provide an alternative mechanism. CDBCs are cryptocurrencies issued by central banks. They are developed using blockchain technologies. CDBCs can be better tracked by central banks, thereby offering more security and efficiency.
CDBCs offer all kinds of security and regulatory benefits. Using CDBCs is obviously more hygienic than exchanging physical cash. More importantly for governments, all CBDC transactions can be tracked by central banks. This can prove to be very effective in combating money laundering and terror funding. Tracking can help provide early warnings of potential financial scams. Governments can ensure better accountability for individual and corporate tax compliance.
CDBCs can significantly cut the need and expense of printing currency. According to some estimates the cost of printing cash in the US in 2019 was $1 Billion. CDBCs can bring significant savings to governments and taxpayers. It is worth noting that CDBCs are meant to supplement paper money rather than to replace it entirely. This can help ensure that unbanked populations in remote regions are not excluded. One of the reasons why banking services don’t reach remote areas is cost. CDBCs can eliminate most costs related to handling and carrying cash. Reduced costs can make banking a lot more accessible. In the long term the use of CDBCs can potentially bring banking services to 2.5 billion of the world’s unbaked.
Finally, CDBCs can be a great way to send remittances. With the potential to eliminate cash from remittance transfers CDBCs can help cut out middlemen and reduce costs every time one has to send money online.
Digital dollar and e-euro
The dollar and the euro are well on their way to going digital. In May 2020 France’s central bank successfully tested a blockchain-based euro by making transactions worth $44 million. This was a major milestone towards the launch of a CBDC euro. The European Central Bank confirmed that further testing of the e-Euro is ongoing.
The Digital Dollar Project is similarly exploring multiple facets of the tokenization of the USD. This will involve many complexities because a vast amount of the world’s forex reserves are maintained by governments in USDs. There is another motivation for introducing the USD as a CDBC. With other major currencies going digital the USD may lose popularity and marketshare. Some economists see the digitization of the USD as an inevitable evolutionary step. Others see it as a competitive necessity.
Despite the many advantages of CBDCs some vital issues remain to be addressed. Many leading publications across the world have given voice to these concerns. Primarily the concerns relate to fears of excessive surveillance and the erosion of privacy. A wide adoption of CBDCs would put consumer spending data in the hands of private companies. This could create a potential for misuse of data for corporate gain.
The National Bank of Belgium said that CBDCs could help facilitate large scale withdrawals of money in an emergency. This could cause bank runs resulting in bank insolvency, which would worsen an economic crisis. According to some economists the intangible nature of CBDCs can be a psychological barrier to wider adoption. There are also concerns about CDBCs creating uncertainties in exchange rates and central banking mechanisms. Finally, the widespread use of CBDCs could further legitimize decentralized and unregulated cryptocurrencies such as Bitcoin.
Any emerging technology comes with benefits and risks. With CDBCs the benefits seem to outweigh the risks. This has made them very popular. Russia, Uruguay, and several countries in Europe and the Middle East are in various stages of developing their unique CBDCs. China recently unveiled The Digital Yuan, the largest CBDC project to date. The IMF reports that “80% of central banks are exploring CBDC at some level”.
It is inevitable that governments will create and launch CDBCs. The larger question is related to the speed and spread of their adoption. Information is a necessary enabler to better decision making. It behooves us to understand CDBCs in depth, and follow the development of this important technology.